Mailbag Monday: Finding the Right 529
I wanted to ask your thoughts on finding the right 529 plan. Aside from hiring an actual financial planner, are there any resources that you would recommend as starting points in our search (websites, etc.)? There are so many options that finding the plan that best fits our needs seems daunting.
— Linda
The best resource for this is Savingforcollege.com, which has information about fees, plan ratings, and comparison tools. You’ll find everything you ever wanted to know – and then some – on that site.
The first step is to look at the plan or plans offered in your state, particularly if you get a tax credit for contributing there. Check out how well your state’s plan performs — the site has 2013 performance rankings listed here, broken down by the last year, the last three years, five years and ten years.
Source: Savingforcollege.com
You also want to look at investment options, because you want a menu of investments in line with your goals. If, for instance, you’re risk adverse, or your child is older (and you’ll need this money soon), you want options that allow you to tone down the risk, like a CD. Your best bet? Finding a plan with age-based options, which will work much like a target date retirement fund — when the child is young, your investments are fairly aggressive. As he or she ages, they automatically rebalance to be more conservative and lessen your risk.
Finally, expenses. Fees eat up your earnings, so they matter a great deal. In DC, for instance, a plan might cost you over $2,400 on a $10,000 investment over ten years. Louisiana, on the other hand, has one of the lowest-fee plans, with a cost of only $591 over that same time period with that same investment. For more on fees, check out Savingforcollege.com’s fee study here.
If you plan to work with a fee-only financial planner, he or she can help you with this. You can also enroll yourself — the process is fairly simple. There are also broker-sold plans, which come with fees and sales charges. I would avoid these if possible, because these costs will cut into your return.
